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Benefits and Risks of Extending Business Credit

Topics: Finance, Cash Flow & Working Capital, Credit & Payments

80% of large enterprises believe they’ve built strong relationships with their SMB customers, but only 55% of SMBs agree. It’s a gap in perception that’s been years in the making. 

The SMB Perspective

There’s nothing small about the economic impact of small and medium-sized businesses (SMBs), which are generally defined as companies with fewer than 100 employees and annual revenue of less than $50 million. About 90% of businesses worldwide are SMBs, and by some estimates published by the World Economic Forum, they provide 70% of employment worldwide and up to 70% of the global gross domestic product (GDP). However, accessing financing continues to be a major obstacle to SMB growth. 

Apruve Statistic Graphic

The Enterprise Perspective

Though SMBs represent a significant revenue stream opportunity for enterprise organizations, the costs and complexity of managing payment processes for a large number of small entities have often made SMBs less attractive as customers for large enterprises. In addition, the risks of extending business credit to SMBs have also kept enterprises from mining this high-potential market. In this article, you’ll learn about the benefits and risks of extending business credit, and ways that automation in business credit can alleviate risk and generate growth for enterprise organizations.    

What to Consider when Extending Business Credit to SMBs

SMBs usually make up the long-tail customer cohort, which, in most enterprises, is the 80% of the customer base that generates just 20% of the revenue. The other customer segment is high-value, larger businesses that bring in 80% of the revenue. Read more about the 80/20 rule and the enterprise B2B long tail. 

Prior to the digital age, there was little difference in the credit and payment processes used for all customer segments. With only modest revenues and all of the work of a larger customer, SMB customers were not exceptionally profitable for the large enterprise merchant. 

Digital transformation has allowed enterprises to tailor business interactions more closely to the needs of different customer segments. It no longer takes extraordinary effort to underwrite SMBs. In addition, in many enterprises, SMBs are now viewed as highly sophisticated retail customers and the SMB customer experience is being realigned with this shift. Extending credit to the long-tail cohort offers enormous benefits, and many of the risks can be mitigated through automation. 

What are the Benefits of Extending Business Credit?

Access to cash flow and capital is one of the largest pain points for SMBs. Extending business credit is an opportunity for enterprises to tap into this market and the economic engine that SMBs represent. Benefits of extending business credit to the long-tail customer segment include:  

  • Increased sales – Helping SMB customers overcome cash flow obstacles allows SMBs to pursue a higher growth trajectory. When that occurs, enterprises see increased average order value (AOV) and higher order frequency. 
  • New revenue channel – Enterprises can bypass traditional distribution channels and create new revenue streams within the SMB market. 
  • Increased customer loyalty – Empowering SMB customers with the business credit they need demonstrates that enterprises understand their customers’ needs and are invested in their success. 

What are the Risks of Extending Business Credit?

The downside of extending business credit is clear - enterprises risk not being paid or being paid late, which impacts working capital. The amount of time and resources spent to secure payment can also increase fixed costs for the enterprise.  However, the benefits of extending credit exceed the risks for large enterprises with the right technology tools. 

How Does Automation Mitigate Risks of Extending Business Credit?

A platform like Apruve provides automation in business credit, enabling enterprises to bypass many of the risks outlined above. The Apruve Payment Platform automates credit, payments and A/R processes, while lenders in the Apruve Global Credit Network take on the risk of late and default payments. With Apruve, enterprises can extend immediate trade credit to SMB customers at the point of checkout, and are guaranteed next-day payment on open invoices, reducing Days Sales Outstanding (DSO) to one. 

By integrating automation in business credit with a global network of trusted lenders, Apruve gives enterprises the flexibility to build financed trade credit programs tailored to their customers. Net terms, pay over time, buy now pay later (BNPL), and prepaid are some of the trade credit programs enterprises can implement with Apruve. 

Advantages of Automating Extending Business Credit

Apruve automates the entire credit extension process end to end, including:

  • Prequalification and onboarding, which takes as little as three minutes 
  • Protection against fraud by verifying SMBs against multiple databases
  • Extending credit lines that can exceed $1 million

Enterprises that partner with Apruve see up to a 50% reduction in fixed A/R costs. A/R staff can allocate more time to troubleshooting and relationship-building with higher-value customers while Apruve manages the SMB credit and payments. 

In addition, with Apruve, enterprises can extend immediate business credit to SMBs in a streamlined digital experience that doesn’t take time away from their main objective: growth. SMBs can manage their credit using the buyer portal to create purchasing teams, autopay, and track invoices. Operating expenses for SMB customers are about 10% higher as a percentage of revenue than for enterprise organizations, so they’re looking for every opportunity to simplify processes and cut administrative costs.

Automation Increases ROI on Trade Credit

Automating business credit is a game-changer for large enterprise organizations that want to improve long-tail margins and grow their SMB customer segment. Apruve’s immediate credit decisioning and simplified credit and payments process enables enterprises to cater to the needs of SMBs without exposure to the risks of payment delays or default. Apruve’s end-to-end digital experience promotes higher conversion rates as well as SMB customer retention and relationship expansion. By helping SMBs manage their cash flow and increase efficiency, enterprises show their commitment to their SMB relationships. 

Apruve is the only provider combining trade credit automation with guaranteed next-day financing on all open invoices. Apruve understands the dynamic of enterprise-SMB business relationships, and offers a platform built to support the acceleration of growth in organizations of all sizes. To learn more about the advantages of putting trade credit on autopilot with Apruve, set up a personal conversation or demo with one of our specialists today. Extending business credit to SMBs has never been simpler or more profitable.   

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Apruve enables large enterprises to automate long-tail credit and A/R so you can stop spending 80% of your time and resources on 20% of your revenue. We partner with each of our customers to solve their unique credit, payment, and accounts receivable challenges and build the right credit solutions for your markets, customers, and goals. 

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